DUE DILIGENCE ITALY: definition
The concept of due diligence derives from the Anglo-American experience, it has to be intended as an investigation procedure aimed at investigating and assessing a company’s (the so-called “target”) contents, in order to allow evaluations of mainly economic nature (report). It is a process that is used to analyse value and conditions of a company which will be soon subject to acquisition, extraordinary operations or investments.
The due diligence process aims at evaluating through a thorough information collection the convenience regarding the feasibility of a business, it allows identification of potential risks and problems related to its implementation. At the same time, the due diligence procedure allows to draw up solid ground to start negotiations, in view of the completion of significant economic operations (corporate acquisition operations, mergers, divisions).
If from the due diligence process, which is aimed to acquire a company, it does not at least immediately emerge any liability, which in contrast is disclosed afterwards, the buyer may ask the seller for more warranties and so that broaden the liability.
In this context, the objectives and modalities of “due diligence” procedures have to be considered changeable, according to the context in which one is acting. Certainly, the most interesting aspects are those related to the business, fiscal and commercial activity.
DUE DILIGENCE ITALY: different typologies
The “due diligence” process is prone to variations according to the object of investigation, that may concerns the whole business or just some aspects of it.
The following due diligence typologies can be identified according to:
CLIENT:
- “Acquisition due diligence”, if the client/potential buyer asks for a due diligence on the target company;
- “Vendor due diligence”, if the target company orders a due diligence on its own accounts.
OBJECT OF INVESTIGATION:
- “Financial due diligence”, it aims at verifying the accuracy of accounting, economic, asset and financial data of the target company (namely the company/corporation which a subject wants to acquire);
- “Legal due diligence”, it aims at processing and evaluating the main information about subjective legal situation related to assets and liabilities the target company is holder of, and identifying any critical aspects. It is generally carried out by professionals appointed by the buyer (or by the subject who intends to collect information about the target company), and it is often preceded by a “Letter of Intent”, which regulates modalities and duration of the due diligence procedures and the different phases to follow in order to evaluate and refine the acquisition operation;
- “Fiscal due diligence”, it is inteded for investigating fiscal problems and possible liabilities of the company which a subject is interested to buy;
- “Strategic due diligence”, it is aimed at identifying strengths and weaknesses in relation to strategic plans linked to the extraordinary operation, and the internal and external risks that pose a threat to pursue the objective.
STAGE OF IMPLEMENTATION:
- “Pre-acquisition”, when it is carried out before acquisition of the target company, it aims at identifying any accounting issues, legal risks, financial risks or other type of risks;
- “Post-acquisition”, when it is implemented after the acquisition, it is often limited to accounting aspects of the target company in order to detect any discrepancy and proceed with amendments to the price paid.
SCOPE:
- “Full”, complete investigation having as object all aspects of the target company (accounting, fiscal, legal…);
- “Limited”, investigation limited to certain areas.
PLACE OF IMPLEMENTATION:
- “On site”, the analysis is undertaken at the headquarters of the target company;
- “Data Room”, the analysis is carried out in a separate venue, generally a lawyer's office or a consulting company's office.
Therefore, since the due diligence key objective is to provide to potential buyer useful information about advantages in regard to a potential acquisition of the target company, it will be necessary to acquire a series of documents for the purpose of fulfilment of the investigation process (due diligence checklist):
- Up-to-date Chamber of Commerce company registration;
- Shareholders' register, in order to verify the target company shareholders';
- Articles of association and target's statute;
- Accounts and company registers;
- Possible shareholders' agreements.
Investigations on the target company's assets (movable and immovable assets) and target company-signed agreements (and their nature) may be useful as well.
